Using the maximum ratios for a conventional mortgage, how big a monthly payment could the Taylor family afford if their gross ( before- tax) monthly income amounted to $ 3,500? Would it make any difference if they were already making monthly installment loan pay-ments totaling $ 750 on two car loans
I don't know what your book suggests, but any experts recommend that no more than 28% of after tax income be spent on housing. That includes taxes, utilities, insurance, and mortgage.
I can't give you an exact figure because the problem doesn't state the net income.
To calculate the maximum mortgage payment the Taylor family can afford using the maximum ratios for a conventional mortgage, we need to consider their gross monthly income and any existing monthly debt payments. Let's break down the steps:
1. Calculate the front-end ratio: The front-end ratio represents the percentage of the monthly income that can be used for housing expenses. Typically, lenders prefer a front-end ratio of no more than 28%. To calculate this, multiply the gross monthly income by 0.28.
Front-end ratio = Gross monthly income * 0.28
In this case, the Taylor family's gross monthly income is $3,500.
Front-end ratio = $3,500 * 0.28 = $980
So, the maximum amount they can allocate for housing expenses is $980.
2. Consider existing debt payments: If the Taylor family has existing debt payments, such as monthly installment loan payments on car loans, we need to account for those as well. In this case, the family is making monthly installment loan payments totaling $750 on two car loans.
3. Calculate the back-end ratio: The back-end ratio represents the percentage of the monthly income that can be used for all debt obligations, including housing expenses and existing debt payments. Typically, lenders prefer a back-end ratio of no more than 36%. To calculate this, multiply the gross monthly income by 0.36 and subtract the existing debt payments.
Back-end ratio = (Gross monthly income * 0.36) - Existing debt payments
Back-end ratio = ($3,500 * 0.36) - $750 = $1,260 - $750 = $510
So, the maximum amount they can allocate for total debt obligations and housing expenses is $510.
4. Determine the maximum mortgage payment: Since the front-end ratio is more restrictive, the maximum mortgage payment the Taylor family can afford is $980.
In summary, the Taylor family with a gross monthly income of $3,500 can afford a maximum mortgage payment of $980 if they do not have any existing debt payments. However, if they already have monthly installment loan payments totaling $750 on two car loans, the maximum mortgage payment they can afford would be reduced to $510.